740 exam 2 october 24
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A Statement of Basic Accounting Theory (ASOBAT) assumed that the evaluative framework of standards and guidelines was dependent upon the objectives of accounting
true
the going concern postulate states that unless there is evidence to the contrary it is assumed that the firm will continue indefinitely
false
the key group in moonitz set of postulates consists of postulates stemming from accounting itself
true
the key imperative postulate in ARS 1 appears to be stability of the monetary unit
false
the lower of cost or market valuation of inventories is an example of disclosure principle
true
the main problem standing in the way of newer information approaches is the perceived competitive disadvantage of making public matters that management would prefer to keep secret
false
the overriding message of SATTA is that current cost should be accepted as the dominate valuation method
false
the postulates and principles approach was concerned with user objectives
true
the proprietary theory approach largely coincides with the components of income measurement as it is presently construed in historical cost based systems
false
the purpose of ASOBAT was to refine the objectives of financial statements as a part of a metatheoretical structure
true
the purpose of Statement of accounting theory and theory acceptance (SATTA) was to provide a survey of the current financial accounting literature and a statement of where the profession stood relative to accounting theory
true
the time period idea is somewhat artificial because it creates definite segments out of what is a continuing process
false
the trueblood committee report, the meaning of the world accountability is limited to the functions of safekeeping of assets and ensuring that they are used in accordance with investors purposes
false
the trueblood report noted that during the short run cash flows are a better predictor of cash flow generating power than are earnings
true
there are eight broad principles in ARS 3
true
under entity theory, creditors are considered equity holders
entity theory
under which of the following theories would the accounting equation be total assets = total equities (including liabilities)
false
when the business is viewed in the context of accounting as well as in its legal form, it is clear that the entity is identical to its owner
the entity is separate from its owners
when we view the business entity in the context of accounting as well as in its legal form, it is clear that
postulates
which of the following are defined in the text as basic assumptions of the business environment?
input oriented principles
which of the following are defined in the text as broad rules that guide the accounting function
principles
which of the following are defined in the text as general approaches utilized in the recognition and measurement of accounting events
principles
which of the following are defined in the text as general approaches utilized in the recognition and measurement of accounting events?
going concern time period accounting entity monetary unit
which of the following are the basic postulates underlying historical cost?
Committee on Accounting Procedure (CAP)
which of the following bodies did not publish one of the important committee reports and documents that lead to accounting objectives and standards?
comparability
which of the following concepts applies to users of financial statements
comparability uniformity
which of the following concepts focuses on prepares of financial information?
accounting terminology bulletin No 1
which of the following documents contained a definition of accounting that fortified the perception of the accountant as a learned professional whose presentation must be accepted by those who do not have qualifications and credentials
basic concepts and accounting principles underlying financial statements of business enterprises (APB Statement 4)
which of the following documents first stated that users of financial statements should be knowledgable and should understand the characteristics and limitations of financial statements
basic concepts and accounting principles underlying financial statements of business enterprises (APB Statement 4)
which of the following documents stated fundamental concepts of financial reporting that would serve as a foundation for the opinions of the APB?
postulates are generally defined as basic assumptions that cannot be verified
which of the following is a true statement
he rejected a deductive approach rooted in reasoning alone
which of the following is a true statement regarding Moonits approach to ARS 1
concepts
which of the following is an accurate overall label for the terms postulates and principles?
postulates should have played a less passive role
which of the following is not a criticism that has been aimed at ARS 1?
if purchasing power of the monetary unit is not stable, historical cost is still justified
which of the following is not a possible outcome of postulate C-4, stability of the monetary unit?
it does not state important evolutionary changes that had begun to occur
which of the following is not a problem of APB statement 4 mentioned in the text?
the authors refused to abandon historical cost
which of the following is not a reason why ARS 1 and ARS 3 fell short of the goal of obtaining a framework for APB accounting opinions
the truth of a law or principle means that it should not be replaced by a new system
which of the following is not a true statement
the authors were able to identify a single concept of income that was superior to others
which of the following is not a true statement regarding ARS 1 and ARS 3?
to relate the evaluative framework of standards and guidelines to objectives themselves
which of the following is not one of the four objectives of accounting given by ASOBAT
the key imperative postulates appears to be consistency
which of the following is not true regarding the imperatives of ARS 1?
it allows for different accounting methods to be followed in interim periods
which of the following is not true regarding the time period postulate
the imperatives
which of the following is the key group in Moonitz set of postulates
one of its principles states that revenue is earned by the entire process of operations of the firm rather than at the point of sale
which of the following is true regarding ARS 3?
AICPA (American Institute of Certified Public Accountants)
which of the following organizations published "objectives of financial statements" (trueblood committee report)
American Accounting Association (AAA)
which of the following organizations published ASOBAT?
going concern
which of the following postulates is violated when liquidation values for assets and equities are reported under ordinary circumstances
going concern
which of the following postulates state that unless there is evidence to the contrary it is assumed that the firm will continue indefinitely
relevance verifiability freedom from bias quantifiability
which of the following set of standards is at the heart of ASOBAT?
proprietary theory
which of the following theories assumes that owners and the firm are virtually identical?
entity theory
which of the following theories assumes that the firm and its owners are separate beings?
proprietary theory
which of the following theories would the accounting equation be total assets - liabilities = owners equity
to emphasize the creative skill and ability of the accountant whose presentation should be accepted by those who do not have his or her qualfiicaitons or credentials
which of the following was not a goal of ASOBAT
constraining principles input oriented principles
which type of accounting principle is concerned with general approaches or rules for preparing financial statements and their content
output oriented principles
which type of accounting principles is concerned with the comparability of financial statements of different firms?
common stockholders
who are residual equity holders
true
APB statement 4 adopted a very strong emphasis on the diversity of users
False
APB statement 4 was in agreement wit ASOBAT that financial statements should be oriented toward a limited group of users
true
APB statement No 4 acknowledges a conflict between the relevance and reliability objectives
true
ARS 1 and ARS 4 represent a milestone in the attempt to provide a unified theoretical underpinning for financial accounting rules by the APB
the needs of the users of accounting information
ASOBAT emphasized which of the following in its defintion of accounting
Expenses are costs that expire as a result of generating revenues. Some expenses can be directly identified with either specific revenue or specific time periods. However, many important expenses cannot be so identified. The process of recognizing cost expiration for categories such as depreciation, cost of goods sold, interest, and deferred charges is called matching. Matching implies that expenses are being recognized on a fair and equitable basis relative to the recognition of revenues.Matching is currently under attack because the historical cost approach often tends to substantially understate expense measurements relative to the value of expired-asset services. Also the systematic and rational methods employed under GAAP tend to be extremely arbitrary.
Discuss the matching principle and how it applies to recognizing expenses. Why is the matching principle currently under attack?
The residual equity theory is a variant of both proprietary and entity theory. The residual equity holders are that group of equity claimants whose rights are superseded by all other claimants, the common stockholders. Common stockholders are the ultimate risk takers within an enterprise. Their interest in the firm serves as a buffer or protector for all groups with prior claims on the firm, such as preferred stockholders and bond owners. The underlying assumption of the residual equity theory is that information appropriate for decision-making purposes, such as that helpful in predicting cash flows, must be supplied to the residual equity holders. The balance sheet equation under this approach would be "Total Assets - Total Specific Equities (including liabilities and preferred stock) = Residual Equity." Although the assets are still owned by the firm, they are held in a trust type of arrangement and management's objective is maximization of the value of the residual equity. Income accrues to the residual equity holders after all other claims have been met. Interest and preferred dividends (but not common dividends) would be deductions in arriving at income.
Discuss the residual equity theory and its assumptions. Include a description of the accounting equation used and how income would be computed.
The most prevalent revenue recognition point is at the point of sale. Other possibilities may arise, however, such as the firm's "critical event." The critical event is the operation function that is the most crucial in terms of the earning process. However, ARS 3 states that revenue is earned by the entire process of operations of the firm rather than at one point only.The conceptual framework of the FASB states that revenue recognition occurs in accordance with two criteria: (1) the assets to be received from the performance of the revenue function are realized or realizable, and (2) performance of the revenue function is "substantially accomplished" (earned). Realized means that the firm's product or service has been converted to cash or claims to cash, while realizable has been defined as the ability to convert assets already received or held into known amounts of cash or claims to cash.
Discuss the revenue recognition principle and how the terms "critical event," "earned," "realized," and "realizable" apply to revenue recognition.
ANSWER: Postulates are basic assumptions concerning the business environment. They cannot be verified, but serve as a basis for inference and a foundation for deducing propositions. ARS 1 identified and defined the basic postulates of accounting. These postulates were of two different types. Groups A and B were made up of general, descriptive postulates that were derived from the economic and political environments. The second category is value judgments.The postulates themselves are in three groups: the environmental group, those stemming from accounting itself, and the imperatives, with the imperatives being the key group. The imperatives correspond to objectives that should be striven for. The key imperative postulate appears to be stability of the monetary unit.Principles are general approaches utilized in the recognition and measurement of accounting events. Most of the principles listed in ARS 3 were reasoned from the postulates of ARS 1. These principles are divided into two main types: input-oriented principles and output-oriented principles. Input-oriented principles are broad rules that guide the accounting function and include general underlying rules of operation and constraining principles. Output-oriented principles involve certain qualities or characteristics that financial statements should posses if the input-oriented principles are appropriately executed.
Distinguish between a postulate and a principle as they are used in ARS 1 and ARS 3. Identify the major categories of each that are included in these two studies.
Input-oriented principles are concerned with general approaches or rules for preparing financial statements and their content, including any necessary supplementary disclosures. Output-oriented principles are concerned with the comparability of financial statements of different firms. Input-oriented principles include recognition, matching, conservatism, disclosure, materiality, and objectivity. Out-oriented principles include comparability, consistency, and uniformity.
Distinguish between input-oriented principles and output-oriented principles and list at least three principles in each category.
Proprietary theory assumes that the owners and the firm are virtually identical. This theory is descriptive of economies made up largely of the small owner-operated firms that existed prior to the Industrial Revolution. More recently it has been applied to large oligopolistic firms in an attempt to bring the absentee owner to center stage when viewing the business enterprise. These absentee ownership claims were legitimized by measuring profit available for distribution to owners rather than the notion that earnings - and capital - belong to the corporation itself. Under proprietary theory, the assets belong to the firm's owners, the liabilities are their obligations, and ownership equities accrue to the owners. The balance sheet equation is "Total assets - Total liabilities = Owners' Equities." Income represents the owners' increase in both net assets and owners' equities arising from operations during the period.Entity theory assumes the firm and its owners are separate beings. The assets belong to the firm itself; both liability and equity holders are investors in those assets with different rights and claims against them. The balance sheet equation is "Total Assets = Total Equities (including liabilities)." Under orthodox entity theory, stockholders have rights relative to receiving dividends when declared, voting at the annual corporate meeting and sharing in net assets after all other claims have been met. Owners' equity accounts do not represent their interest as owners but simply their claims as equity holders. Similarly, net income does not belong to the owners although the amount is credited to the claims of equity holders after all other claims have been satisfied. Income does not belong to capital providers until dividends are declared or interest becomes due. In measuring income, both interest and dividends represent distribution of income to providers of capital. Hence, both are treated the same and neither is a deduction from income.If the entity theory were taken to its logical conclusion, the owners' equity accounts would belong unequivocally to the firm, despite the presence of stockholder claims. Also, income would belong to the firm itself, and in turn, interest and dividends would both be deductions in calculating it.
Distinguish between proprietary theory and entity theory. Include descriptions of the balance sheet equation used by each and how income is computed.
true
Moonitz felt that APB statement 4 should have been issued as an opinion rather than as a statement because departures from GAAP made in a statement did not have to be disclosed
true
SATTA expressed the opinion that choice among accounting theories could not be made at the time because of the diversity of users and their presumably different objectives and information needs
false
consistency refers to the degree of reliability users should find in financial statements when evaluating financial condition or the results of operations on an interfirm basis or predicting income or cash flows
false
the decision usefulness approach is one of the classical approaches to accounting theory mentioned in SATTA
The going-concern postulate states that unless there is evidence to the contrary, it is assumed that the firm will continue indefinitely. Under ordinary circumstance, reporting liquidation values for assets and equities is a violation of this postulate. This principle is too broad to lead to any kind of a choice among valuation systems, including historical cost. The postulate was also criticized because the time period of continuity is presumed to be long enough to conclude the firm's present contractual arrangements. However, by the time these affairs are concluded, they will have been replaced by new arrangements. Hence, the implication is one of indefinite life. However, over the long run, many firms do conclude their activities. Therefore, continuity is more in the nature of a predication than an underlying assumption.
What is the going-concern postulate of ARS 1, and how has it been criticized?
ARS 1 and ARS 3 failed for several reasons including the following:(1) The accounting profession would not abandon historical cost.(2) The postulates and principles were not complete and therefore could not exclude all value systems other than the one prescribed in the principles.(3) At least one principle (related to profit recognition) was not derived from any of the postulates.(4) The question of whether valuations of various assets were additive became an issue.(5) The authors were commissioned to find those postulates and principles that would lead to "true income." It has since become evident that no income measurement can be deemed to have such an advantage over competing concepts.(6) They occurred at a time when little formal attention was given to opportunities to react to potential accounting rules for those who will be subject to them.
What were the reasons for the failure of ARS 1 and ARS 3?
true
conservatism has been called the dominant principle of accounting
true
conservatism, materiality, and disclosures are examples of constraining principles
false
a principle contains elements observable by empirical techniques
true
a problem brought up by SATTA is the diversity of users in terms of their decisions and their possible different information needs
true
according to APB 4 basic accounting terminology is defined by whatever is being done in practice
true
according to the trueblood committee report, current values should be reported when they differ significantly from historical costs
true
accountability refers to the responsibility of management to report on achieving goals for the effective and efficient utilization of enterprise resources
true
accounting concepts have largely evolved from practical operating necessities including income tax laws
false
accounting information is determined by supply and demand
true
disclosure will become more important in the future because of market efficiency
false
empirical research has proven that user needs are heterogeneous
true
large parts of APB Statement 4 are restatements of the conventional wisdom of the time
false
matching refers to the fact that all expenses can be directly identified with either specific revenues or specific time periods
false
measurements based on the accountability objective would include earnings per share but not return on its investment
false
the first statement to address the issue of user objectives extensively was ASOBAT
true
one reason ARS 1 and ARS 3 fell short of the goal of obtaining a framework for APB accounting opinions is that the accounting profession refused to abandon historical cost
false
output oriented principles are broad rules that guide the accounting function
true
postulates are basic assumptions concerning the business environment
true
postulates are generally defined as basic assumptions that cannot be verified
false
preferred stockholders are residual equity holders
true
proprietary theory assumes that the owners and the firm are virtually identical
input oriented principles
recognition and matching are examples of
false
relevance is considered the most important of the qualitative objectives of APB statement 4
true
several important committee reports gave rise to objectives and standards in place of the postulates and principles approach
false
the APB was the first to successfully derive an underlying framework of postulates and principles
false
the balance sheet equation for entity theory is total assets - total liabilities = owners equity
